Question

1. University opens a new parking garage and is considering two pricing policies:

(a) Hourly rate

(b) Fixed rate per day

Let’s say the average faculty member earns a wage of $20/hour and has a nonwage income of $40 per day. The garage is considering charging $2/hour and $16/day. What are the effects of these policies on hours faculty members spend on campus?

Answer 1

let x be number of hours the faculty member is working

now if he is going for hourly rate, his revenue will be 20x+40-2x (1)

if he is considering fixed rate per day, his revenue will be 20x+40-16 (2)

Equating 1 and 2 equations x=8

now when x=8 the person will be indifferent between hourly or fixed rate

When x<8 the person is getting more revenue from hourly rate, whereas when x>8 he is earning more revenue from day rate.

So if faculty are working less than 8 hrs they will go for hourly otherwise the day rate